Taxing Internet sales could level the field: Adoption of state option should be easy call

Taxing Internet sales could level the field: Adoption of state option should be easy call

April 25th, 2013 in Opinion Times

Congress shied away for years from the idea of fixing a blanket federal requirement for online businesses to collect and remit state and local sales taxes on online purchases. The bill now being debated in the Senate -- the Marketplace Fairness Act -- tackles this needlessly thorny issue from a different angle. It would give state governments the option to require all but small businesses, those with sales of less than $1 million, to collect and remit state and municipal sales taxes.

Adoption of this state option should be an easy call for Congress, but apparently nothing related to taxes and business lobbyists is easy. A uniform federal law would have been desirable and more efficient. But the Marketplace Fairness Act is the next best measure. Certainly its passage is necessary.

Online businesses and retailers that now escape paying their fair share of state and local taxes are unfairly undermining the nation's bricks-and-mortar stores on Main Street and in malls. Their tax avoidance robs communities everywhere of local jobs and local taxpayer support for the myriad public services that taxpayers and shoppers themselves rely on for essential public services in their home communities.

Online tax avoidance in many cases also directly sponges off bricks-and-mortar stores by enabling shoppers to browse and test products they see in local stores, and then to go online to purchase them just to avoid local sales taxes. The end result of all this tax unfairness, of course, is that it will let online merchants eventually drive local businesses, jobs, tax revenue and local commercial vitality into the ground.

This mercenary dynamic explains why eBay is fiercely contesting the Marketplace Fairness Act. Its sales strategy reflects the model that Amazon has now outgrown: eBay, too, wants to cannibalize the sales of bricks-and-mortar stores long enough to get big enough and rich enough in market-share to have huge warehouses everywhere. Though this process would make billionaires of online CEOs, it would kill many Main Street businesses and shopping malls in many communities.

Absent passage of the bill for tax fairness for bricks-and-mortar stores, e-commerce, of course, will continue its rocket-pace rise of recent years. Online sales went from $995 million in 1999 to $2.34 trillion by 2006, and it has continued to rise since then. The National Conference of State Legislatures estimates state governments lose $23 billion annually in sales taxes, mainly to online commerce -- most of it business-to-business. Tennessee officials reckon the state loses more than $400 million annually in uncollected sales taxes.

The tax losses to states arise from a myopic 1992 Supreme Court ruling which held that businesses that don't have a physical presence, or "nexus," in a given state do not have to pay sales taxes in that state. The high court obviously failed to foresee the digital and online commerce era, which now provides universal nexus for every online business to every state through any Internet-connected device.

A smartphone provides a personal portal to a mall, an outfitter or a muffler shop. With a bar-code scanner, it can instantly fatten commercial behemoths like Amazon, eBay and Overstock.com, by rapaciously making mincemeat of local stores.

Advocates of the Marketplace Fairness Act, including senators in Tennessee and most other states, correctly contend the bill would level the playing field for bricks-and-mortar businesses at all levels of commerce. Its opponents, mainly from the few states have no sales taxes, argue it's unfair to their online businesses that sell products in other states. They further argue that collecting sales taxes for local and state governments around the country would be a massively onerous and needlessly bureaucratic nightmare. But that's not true at all.

New software makes sales tax collection and remittance work an easy, seamless process. Many large bricks-and-mortar retailers with online businesses have perfected the software to meet that requirement. eBay, a hypocritical critic of the Marketplace Fairness Act, also uses such software to help its merchants which do collect and remit state and local taxes.

The core issue in this debate is simply tax fairness. No state or city should lose their local commercial vitality to tax-avoiding monopolistic Internet companies just to enrich their distant billionaire CEOs.